Decentralized BTC Stock Market [Goodbye GLBSE]

[Energizer]

This thread is an attempt to answer the following questions, and to mind storm about the possibility of having an open source decentralized BTC stock market protocol/features/design.

• GLBSE is closed, so what is next?
• Is it possible to have a decentralized BTC stock market in the same manner BTC/namecoin operates?
• Is it possible to have a new protocol/block chain where assets "instead of coins" can be created by the asset issuer instead of mining?
• Is it possible that such block chain handles multiple different kinds of assets instead of one kind of coins?

It seems that the most challenging problem is in the exchange mechanism between assets and e-currencies such as BTC. For that such decentralized stock market has to operate on top of other block chain "if not on top of multiple block chains", where BTC or LTC message signing can confirm assets movement "buy/sell orders" between different accounts.

[jgarzik]

Search the forums for distributed bonds and colored coins.

[justusranvier]

https://bitcointalk.org/index.php?topic=106373.0
https://bitcointalk.org/index.php?topic=92421.0
https://bitcointalk.org/index.php?topic=52494.0
https://bitcointalk.org/index.php?topic=112007.0

[ShireSilver]

I hope people stop soon with the colored/tainted coins nonsense. There's far too many different uses for the underlying technology for them all to be shared with only 21 million bitcoins (even if you use them as individual satoshis). Its good not just for stocks, but all kinds of other property that needs to have ownership managed.

[PawShaker]

In my opinion the problem is much deeper. Securities, by their definition, are contracts. In other words, they are agreements. They have consequences outside of the virtual domain. For securities to work there has to be some sanction for braking the contract.

Typical conditions for any security is that the management must inform investors honestly. Now, how on earth, we can get a distributed tribunal to judge that? What kind of sanction can be applied in a quasi anonymous habitat where nicks are dime per dozen?

Something like “whoever makes a block with this transaction will be a judge” does not work, because you need some qualifications to be a judge. For instance, judge should not be 12 year old. Please keep in mind that there is no restriction on age of miners.

[jgarzik]

Something like “whoever makes a block with this transaction will be a judge” does not work, because you need some qualifications to be a judge. For instance, judge should not be 12 year old. Please keep in mind that there is no restriction on age of miners.

In the proposed smart property / smartcoin / colored coin designs, the blockchain merely tracks ownership of an abstract digital object.  Nothing more.

It is up to software and -- as you point out -- the real world to attach meaning to the digital object.

[matthewh3]

One thing that would be good is an exchange to trade coloured coins.

[Energizer]

So what would such colored coins be then? and how it would come to existence?

[Energizer]

When I first created this thread, I wasn't aware of the term "colored coins". Thx for everyone who've posted to this thread, your posts were very informative.

It seems that colored coins is going to be used pretty soon in replacing GLBSE. I am personally thinking about moving my asset "Bitnodes" to colored coins. Currently I am examining this solution: https://bitcointalk.org/index.php?topic=117630.0

[matthewh3]

When I first created this thread, I wasn't aware of the term "colored coins". Thx for everyone who've posted to this thread, your posts were very informative.

It seems that colored coins is going to be used pretty soon in replacing GLBSE. I am personally thinking about moving my asset "Bitnodes" to colored coins. Currently I am examining this solution: https://bitcointalk.org/index.php?topic=117630.0

I'm doing the same with my ex-GLBSE asset 'RSM'.  Maybe you could add to my bounty - https://bitcointalk.org/index.php?topic=117630.msg1270041#msg1270041 - there is also another bounty - https://bitcointalk.org/index.php?topic=117630.msg1273753#msg1273753

[Energizer]

When I first created this thread, I wasn't aware of the term "colored coins". Thx for everyone who've posted to this thread, your posts were very informative.

It seems that colored coins is going to be used pretty soon in replacing GLBSE. I am personally thinking about moving my asset "Bitnodes" to colored coins. Currently I am examining this solution: https://bitcointalk.org/index.php?topic=117630.0

I'm doing the same with my ex-GLBSE asset 'RSM'.  Maybe you could add to my bounty - https://bitcointalk.org/index.php?topic=117630.msg1270041#msg1270041 - there is also another bounty - https://bitcointalk.org/index.php?topic=117630.msg1273753#msg1273753

Yes, I am planning to do so soon.

[PawShaker]

I still think we are just scratching the surface of the problem. Coloured coins will only provide a "shareholders registry" service. It will not substitute for "stock exchange". Anyone running an exchange is still vulnerable to charges of offering securities without prospectus to unsophisticated clients. I understand that GLBEX was relying on argumentation that BTC is monopoly money, so “securities” traded on it were not real securities. One can argue on what BTC is, but it is hard to argue that BTC is worthless. Securities can be issued based on anything of value; they may be related to some commodity.

The challenge we face is how to create a decentralised trading platform.

[jgarzik]

I still think we are just scratching the surface of the problem. Coloured coins will only provide a "shareholders registry" service. It will not substitute for "stock exchange".

100% correct

The distributed bond thread describes a separate P2P network and DHT which would be used as a network where traders advertise assets for sale, and make offers.

[casascius]

In my opinion the problem is much deeper. Securities, by their definition, are contracts. In other words, they are agreements. They have consequences outside of the virtual domain. For securities to work there has to be some sanction for braking the contract.

Typical conditions for any security is that the management must inform investors honestly. Now, how on earth, we can get a distributed tribunal to judge that? What kind of sanction can be applied in a quasi anonymous habitat where nicks are dime per dozen?

Something like “whoever makes a block with this transaction will be a judge” does not work, because you need some qualifications to be a judge. For instance, judge should not be 12 year old. Please keep in mind that there is no restriction on age of miners.

+100

Being aware of this, right here, is the shortest way to explain why I stayed miles away from "investing" in any Bitcoin "stocks".  Here at Bitcointalk, we seem keen on showing contempt for the status quo legal framework - the one that lets securities function in any way beyond scamcoins that work on the honor system - and finding brilliant ways to invent our way out of it, without realizing that doing so is about as brilliant as a goldfish inventing its way out of a bowl.

A distributed exchange benefits only scammers.  If one can use distributed technology to evade accountability from the law, one can also use it to evade accountability from their shareholders, effectively negating any and all value inherent in owning shares.  It's a software-based screen-door submarine, it just doesn't work.

Shhh, keep this a secret, the scammers will be upset if everyone figures this out!

[markm]

Maybe what we need then is simply ways for private groups of people who know each other to pool resources.

Are there though any ways of getting to know people that end up with the people being considered a private group whose private pooling of resources is a private matter between them?

It maybe should be pretty much equivalent to my moving coins and notes/bill around from pocket to pocket, except that I happen to be an entity consisting of more than one actual organic lifeform.

-MarkM-

[PawShaker]

[...]
Being aware of this, right here, is the shortest way to explain why I stayed miles away from "investing" in any Bitcoin "stocks".  Here at Bitcointalk, we seem keen on showing contempt for the status quo legal framework - the one that lets securities function in any way beyond scamcoins that work on the honor system - and finding brilliant ways to invent our way out of it, without realizing that doing so is about as brilliant as a goldfish inventing its way out of a bowl.

A distributed exchange benefits only scammers.  If one can use distributed technology to evade accountability from the law, one can also use it to evade accountability from their shareholders, effectively negating any and all value inherent in owning shares.  It's a software-based screen-door submarine, it just doesn't work.

Shhh, keep this a secret, the scammers will be upset if everyone figures this out!

The most amaizing thing about GLBSE was that it actually worked. Practicaly, we wittnessed only one case of dodgy investment instrument. It was under several pass-through labels, but it was the same entity. Vast mayority of people were actually honest (or even plain generous as it came out in case of race horse owners).

If you can recall, Enron went down despite all checks and balances, internal and external audits, etc. All these overheads costed huge amounts of money and in the end it still boiled down to honesty of few individuals.

[odolvlobo]

Like everyone else, I have been considering how a distributed exchange might work. I think it would be better to have a separate block chain. I prefer to leave the bitcoin block chain alone and not weigh it down with other kinds of transactions. The exchange block chain would support merged mining and would not have block rewards, just transaction fees.

[casascius]

The most amaizing thing about GLBSE was that it actually worked.

Securities without accountability is like automobile safety without seatbelts.  If I had to say why I'm not sure I agree, I'd say it's like saying it's amazing that driving without a seatbelt is actually safe, discounting the fact that you are lucky to have never been in an accident.  It's like saying fiat money works because it works today.

[killerstorm]

Typical conditions for any security is that the management must inform investors honestly. Now, how on earth, we can get a distributed tribunal to judge that? What kind of sanction can be applied in a quasi anonymous habitat where nicks are dime per dozen?

I think it is important to decouple trading platform from other stuff like verification/rating/audit. Trading platform must be completely open for everybody: nobody can prevent you from trading, nobody can seize your assets etc.

On the other hand, verification/rating/audit is completely different business. When platform is open and is thus open to all kinds of scammers, legit companies will HAVE to use verification/rating/audit services, otherwise they will get drowned in a crowd of scammers.

Existing centralized exchanges kinda sidestepped this issue: they filtered out obvious scam, so users thought that some level of verification is there, so there was NO urgent need for indepth verification and there was no competition for this service because some service is already bundled with trading platform.

So it is similar to how Microsoft was bundling IE6 with Windows XP and this "feature" poisoned web development for like a decade. Although at the time it was introduced IE6 was actually a good thing..

Anyway... Real demand for verification will create a competition in this area. If some company wants to raise money they have go to some verification/investment banking company and work with them. Perhaps this verification company will demand some accounting to be done in their format, perform audit, check IDs, ask to sign some contracts and so on. For this they can charge some fee, e.g. 5% of IPO.

Verification companies will compete among themselves: if they have a good track record, it's easier to raise money from IPO (since users trust them) so they can get higher commission. OTOH some smaller companies might try to find luck in less demanding verification companies.

Also there is market for insurance: perhaps a trusted insurer will take like 5% out of IPO and will buy back asset in case of default. Of course, they will insure only legit-looking companies.

So there is strong economic incentive to create a working verification system, and I believe that will launch evolutionary. process. Perhaps process will be painful and we'll go through many scams and defaults, but in the end only fittest will survive, and that would be great.

So back to the question:

1. We do not need distributed verification, we need decentralized verification: it will be done not by one, but by several companies, potentially barrier for entry is rather low...

2. In many countries electronic signature is recognized and is binding. So I believe it is possible to make a contract which will recognize blockchain-based asset owner identification and it will be enforceable. I.e. shareholders can sue issuer. I'm not a lawyer, though. But there is a lot of flexibility in this.

Some people say that it is illegal to issue securities... OK. Make contract such that it is structured like IOU, IOUs are likely not illegal. But this contract won't be publically announced, instead it will be submitted to a trusted 3rd party arbitrator. On the other hand public contract will state that it is just play money. If shit hits fan, arbitrator will make IOU contract public. Then each shareholder can legally demand money from issuer personally, via existing law enforcement system.

This structure is a bit similar to bitcoin contracts: https://en.bitcoin.it/wiki/Contracts

[casascius]

Already, I would bet that if I started a corporation, and structured it so its Articles of Incorporation referenced "colored bitcoins" as shareholders, that it would work for a limited time. This would mainly be due to the fact that in the absence of a dispute or problems, the consensus of the shareholders is enough to establish who the shareholders are.

Imagine it works for years. And then somebody sues me for whatever losses he incurs for whatever reason (suppose he gets hacked and disputes his assertion that he transferred his shares or something) and alleges that the whole scheme of using "colored coins" to denote ownership constitutes a scam.

Either it will work wonderfully, or it will be condemned as hocus pocus and considered null and void.  If a lot of people have a stake in the outcome, it will probably be subject to rounds of appeal, making any given decision guiding at best, rather than final.

The only innovation needed to make this sort of ordeal possible is an easily viewed by anyone serial number on each satoshi, and someone with a lot of balls!